In a previous article, I outlined the natural money economic system that is far more efficient than the current economic system. This system will get the economy out of depression in a short time and will generate constant economic growth at maximum potential. In this article I will outline the conversion from the current system to the natural money economic system.
Introduction of the new money
A government can issue a new natural money currency that will become legal tender within the country. The old currencies should continue to exist, but must not remain legal tender. People will be free to convert their old currency into the new natural money currency. In this way a country can shield itself from the financial system that is in a process of disintegration while not breaking existing agreements that are made in the old currencies such as the Euro or the US Dollar.
Banks that will work under the new natural money system should come into existence. Those new banks must be legal entities that should not have any meaningful positions in the old currencies. Those banks should work under the natural money laws. In this way those banks are shielded from the old financial system. As the old currencies such as the Euro and the US Dollar will still be in existence, they should float against the new currencies.
First only payments for goods, services, taxes and salaries will be done in the new natural money currency. The new natural money currency will be used in the real economy. The financial system will still operate using the old currencies. In this way those two systems are separated and therefore the instability of the financial system will affect the real economy in a far lesser degree.
Conversion of the financial system
Financial markets will at first still operate using old currencies like the Euro or the US Dollar. Existing debts will also remain in Euro or US Dollar. Governments should stop bailing out bankrupt companies and financial institutions and let the markets do their work. The old currencies still do have value as many debts may still have some value. Because interest bearing currencies converted money into debt, there is far more debt than money in the current financial system. Therefore not all debts can be repaid.
After the introduction of the natural money currency, financial markets will slowly be converted into the new currency, but with the restrictions guiding the new financial system. Those restrictions are:
<LI type="disc"> A company must issue stock until debt on its balance sheet meets specific requirements. Bond holders must convert their holdings into common stock. A specific conversion law should make this possible. This conversion can be done at market prices for the bonds and the stocks using the old currency. The conversion law should include the elimination of all short interest on the specific stock before conversion, as bond holders may short the stock to get a favourable conversion rate.
<LI type="disc"> In the new financial system there must be no derivative products (also no futures and options). Derivatives are illegal in the new system. Because in the natural money economy there will be constant economic growth at maximum potential, the financial markets will be very stable, and therefore there is no need for derivative products. Because there exists no interest on money in the natural money economy, interest rate derivatives are also not needed.
<LI type="disc"> Shorting of stock should be prohibited. Shorting introduces an interest in bringing down companies. If people do not believe in a company, their only option should be not to own the stock.
People are still obliged to pay off their debts in the old currencies. They can use their natural money to buy up their debts in the old currencies. Because the natural money currency is legal tender in the real economy, there will be demand for the natural money currency, and therefore it will always be possible to convert the natural money currency into the old currency. Interest payments on those debts should be abolished. This will greatly improve the capacity of the lenders to repay their debts.
When people are repaying their debts, money supply in the old currency will diminish, which creates an upward pressure on the value of the old currency because there is far more debt than money to repay the debt. Governments should spend old currency into existence in such a way that the exchange rate between the old currency and the natural money currency is as stable as possible. There is no other choice but to do this or to default on the debts. Governments should therefore be in control of the central bank that is issuing the old currency. This activity is not inflationary because the money supply will not increase and the value of the old currency will be linked to the natural money currency which is backed by the real economy.
Settlement
Many international payments and debts are in Euro or US Dollar. The EU member states and the US are not engaged in most of those contracts. Therefore the EU members and the US are not in a position to abolish the Euro or the US Dollar. The EU and the US should discuss the management of the Euro and the US Dollar with their international trading partners and the major creditor nations such as China and Japan.
It is not in the interest of trading partners and creditor nations that they accumulate currencies that loose value over time. Countries like China and Japan should use their resources to improve their own wealth instead of subsidising the spending of the EU and the US. The current situation will end in tragedy for both parties as the production of the EU and the US will be outsourced while creditor nations will end up holding worthless currencies. In the natural money system, all countries will use their productive capacity to create their own wealth. With natural money it is very costly to hold foreign currencies for a longer period of time, because all currencies have a holding tax. This will prevent imbalances of payment from getting out of hand.
At some point in the future it becomes clear what the value of all debts is. When there is income or assets backing them up, debts should have some value. Also it will become clear what the market value of the old currencies is. When those two conditions are realised, the financial system is stabilised and the remaining balances in the old currencies can be converted into the natural money currencies. The value of derivatives should be determined by the market using the old currencies. The government has no role in this. Derivatives can never be converted into the natural money currencies.
